The penny has not quite dropped yet. We are heading for an emergency budget which can really only have one priority — the cost-of-living crisis. Normal budget debates, in this context, need to be suspended.
In the hot days of summer, it is hard to think of how things may look when the energy bills start to land in autumn and winter. But for many households, it will be difficult — and for some really difficult. More than ever, budget resources have to be focused on where they will be most needed. The idea of a new 30 per cent income tax rate, championed by Tánaiste Leo Varadkar, needs to be killed off now, to let the budget debate focus on what actually needs to happen.
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Taxpayers, as well as those reliant on welfare payments, need help in the budget as the cost-of-living crisis drags on. The goal is to limit the damage to people’s incomes — it will be impossible to completely insulate the public. In particular, lower earners and also those with relatively modest average incomes — the so-called squeezed middle — need assistance. This need not all come via tax changes. Additional supports for childcare and other social services, for example, could also play a part.
Whatever way the cake is sliced, a new 30 per cent income tax rate is not the way to go. It only benefits those who earn enough to pay at the higher 40 per cent rate — €36,800 for a single person or €45,800 for a single-income couple. These are not high-income levels, but there are better ways to give middle earners gains from a budget package.
Varadkar said that other measures would also be needed in addition to its introduction of the 30% rate to spread the gains
A new 30 per cent rate would cost a lot and so would close off other options. If it was applied to the next €5,000 of people’s income — the first bit now taxed at 40 per cent — it would cost more than €500 million in a full year. If it applied to €10,000 of income it would cost almost €950 million, eating up most of the tax package in one bite.
Varadkar said that other measures would also be needed in addition to its introduction of the 30 per cent rate to spread the gains. But this just isn’t the best way to go about it. It would be better to increase tax credits, which give cash to all taxpayers but proportionately more to lower earners and to widen the standard rate income tax band. Widening the band benefits the same group as introducing a new 30 per cent rate, but the cost of the likely scale of increase would be lower than introducing a new rate.
This would leave more scope in the tax package to help the groups who really need it. It allows the weekly gains to be more skewed towards them — and less towards higher earners, many of whom have savings to help them ride out the cost-of-living crisis. To repeat, we may be in an emergency situation this winter and most help needs to be directed at households who are choosing between food and heating and not at those who might have to forego a second foreign holiday or a new car. ESRI researchers have floated increases in the PRSI tax credit and changes in the way it works as a particularly good way to target lower-income working households.
Part of the difficulty in framing the budget is the uncertainty about what happens next. The inflation rate in July of 9.1 per cent was the same as June, leading to some speculation that inflation may have peaked. This is now a big debate in the US, where lower oil prices are improving the consumer mood and encouraging investors. This is one to watch closely.
In Europe the key factor over the winter will be gas prices, at levels on wholesale markets even higher than when the war first broke out. This is driven in large part by the lowering of Russian gas supplies to the EU and fears of a complete cut-off over the winter. If this happens, then wholesale gas prices will remain elevated and prices to consumers and businesses of gas and electricity will head even higher. That is the potential emergency situation. If, on the other hand, the gas outlook were to ease, then the inflation picture would suddenly start to look a good deal better.
Budget Ministers Paschal Donohoe and Michael McGrath will want to keep some flexibility heading into next year
If the Government knew that price pressures were going to ease, then it could happily throw welfare hikes and tax cuts out in the budget, secure in the knowledge that less will be needed next year. But we just don’t know. So budget Ministers Paschal Donohoe and Michael McGrath will want to keep some flexibility heading into next year — to deal with new spending demand and ride out any slowdown in tax revenue growth.
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There are good arguments that the Irish tax system pushes people into the higher income tax rate of 40 per cent at relatively low incomes compared to most other countries. No doubt the Commission on Tax and Welfare has examined this and will look at the options. It will likely point out that if we want to cut the income tax burden on middle earners in the long run, we need to find new revenues elsewhere. In fact, we need to find new revenues elsewhere anyway.
However, this forthcoming budget will not be about reform. It is about dealing with a cost-of-living crisis. Right now, Donohoe and his officials may well be wondering whether Varadkar is going to push the 30 per cent idea in budget talks or use it as a lever to ensure middle-income taxpayers get relief through other measures. But the Tánaiste should let the 30 per cent idea quietly fade away. Implementing it now would be a serious mistake.